Remember Y2K? Three years ago at this time, there was a virtual frenzy in corporate America and the halls of government over the fear that a "millennium bug" in our computer systems would wreak all sorts of havoc on civilization as we knew it.

It was the leading topic of conversation in boardrooms and at cocktail parties for months on end. It was, for a time, our grand obsession. On a somewhat more serious note, literally trillions of dollars were spent around the world; long-retired Fortran and Cobol programmers were pressed into service and every little gadget you bought had a "Y2K Compliant" sticker on it. (I wore one on my shirt for a few days just so there would be no doubt.) Major industries and agencies were required to certify that they had fixed any potential problems (essentially an impossible task). I was a member of some sort of governmental Y2K task force and prepared a major economic impact study on the subject.

It's hard to believe that all of the hoopla was such a short while ago. So much has happened since then that none of us give it a second thought. But, alas, we should.

Believe it or not, it appears to me that Y2K is playing a not inconsequential role in the sluggishness of our national economic recovery. My logic is quite simple. One of the impacts that Y2K had was to markedly accelerate capital expenditures in 1999. We knew at the time that in many instances this spurt in investment was going to be at the expense of future years. A similar and understandable inventory build-up also occurred as the curtain closed on the 20th century.

While there were no great catastrophes to mar our celebrations of a new millennium - I know, in the wrong year - there are at least three phenomena from the Y2K hysteria which still linger. First, the burst in investment served to convince the Federal Reserve (and almost no one else) that the economy was overheating. The response was aggressive increases in interest rates far beyond what was necessary to keep inflation in check. (We won't mention the fact that there hadn't been any significant inflation in the economy for years before that.) That policy stance backfired as business activity slowed a year or so later and not even 11 straight rate cuts would get things moving.

Second, the huge amount of 1999 investment (buying everything now instead of later just in case Y2K craters your old stuff) left the corporate sector with limited flexibility. Capital budgets were cut for 2000 and 2001, and the short-term productivity benefits were not commensurate with the enormity of the outlays. (Somewhat comparable to the current spending for heightened security, but at a much greater magnitude.) As the economy slowed in 2001, the capital mix was not suited to the needs of major firms. Add Sept. 11 and the recent stock scandals to the equation, and you create a difficult environment for stimulating meaningful growth.

Third, many of the purchases associated with Y2K were computers, telecommunications equipment, and other microchip-laden products. Capacity was expanded in these sectors, with the expectation that exploding global demand would keep orders flowing. Weakness around the world has delayed this digital deluge, and manufacturers are dealing with too much plant (and debt).

Fortunately for all of us, the Y2K scare proved to be much ado about nothing. The hype was way overblown. Nonetheless, amid all of that smoke there were at least a few embers of fire which are only now beginning to flame. The current economic slowdown is being complicated, lengthened, and intensified by that silly little bug that nobody even thinks about any more. It may be forgotten, but it is definitely not gone.

Dr. M. Ray Perryman is president and chief executive officer of The Perryman Group www.perrymangroup.com. He also serves as Institute Distinguished Professor of Economic Theory and Method at the International Institute for Advanced Studies.

San Antonio Business Journal

-- Anonymous, October 14, 2002